OPC V/s Foreign Company: Which Is Better For Entrepreneurs

The Companies Act 2013 introduced the concept of OPC (One Person Company) in India. Before this, a single individual wanting to establish a company could only opt for Sole proprietorships. However, proprietors are not incorporated under the Companies Act which leaves them outside the purview of the formal regulatory environment, cease to exist upon death and incapacitation of the owner, and do not offer protection to the personal assets of owners when the company gets entangled in a lawsuit or financial debts.

A foreign company, as per the Companies Act is an enterprise incorporated outside India but has its business operations within India. For instance, a firm incorporated in the United States which has a branch office or JV in New Delhi, Bangalore, or any other state will be considered as a foreign company in India.

OPCs are mainly incorporated by single individuals to fulfills their entrepreneurial aspirations and avail benefits of a company without any complexity of multiple shareholders and hefty compliances. Whereas, a foreign company aims to establish their business in India often with the intent to expand their global reach.

Let’s delve deeper and understand the major differences between OPC and Foreign companies along with detailed insights into OPC Incorporation and foreign company registration process.

One-Person Company and Its Key Characteristics

One Person Company is a corporation constituted by a single national person. OPCs combine the feature of sole proprietorship with a company offering the individual member complete autonomy over their business operations and limiting his/her liability up to the extent of their investment in the company.

For OPC Incorporation, the entrepreneur must be an Indian citizen. Similarly, the applicant must be a natural person and not an artificial entity such as a business or trust. Before obtaining the Certificate of Incorporation, OPCs must appoint a nominee to ensure continuity of business in case of the owner’s death or incapacity.

• Limited Liability: The personal wealth and assets of the owner of OPC remain safeguarded in case the company goes bankrupt or faces a financial crisis. Liability of OPC’s owner is limited to their investment and thus any debt or losses of the company will not be covered by the personal assets of the owner.
• Separate Legal Entity: In case of legal disputes or financial issues, creditors will sue the company and not the owner of OPC. It is nothing but the separate legal identity of the company to incur debts, sue or get sued, and own property under its own name.
• Perpetual Succession: Perpetual succession is the legal provision where a company continues to exist for years even if its members retire, die, go bankrupt, or exit the firm. Unlike sole proprietor, OPCs remain in continuation in case its sole member is unable to discharge his/her duties or pass away.
• No Minimum Paid-up Share Capital: A One Person Company need not comply or maintain a minimum paid-up share capital unlike public company that require Rs. 5 lakhs. However, in case paid up capital of OPC exceed Rs. 50 lakhs or its turnover surpass the Rs. 2 crore mark, it is mandated to convert into a Private Limited Company.

How OPC Registration is Revolutionizing Small Business Ownership? OPC as a business form has offered a single person to establish a company with separate legal identity, limited liability, tax benefits, and fewer compliance requirements.

What are the Limitations of One Person Company?

Several drawbacks within OPCs stem from their solitary ownership. Unlike other companies which are incorporated with a minimum of two or more two directors, OPCs are owned and managed by just a single person. It hinders the company’s ability to access funds, execute large-scale projects, expand to broader and larger markets, and scale up its operations. Such companies deal with the following limitations:

• Limited Growth Potential: One Person Companies often struggle with scalability issues as the single shareholder can channel capital only up to a certain extent, cannot raise equity, offer ESOPs, cannot engage in certain activities, and cannot form Joint Ventures (JV) with other companies.
• Restriction on Certain Activities: As per the Company Act 2013, an OPC cannot engage in Non-banking financial investment activities such as investing in securities of other companies, issuance of convertible debentures, etc. In addition, an OPC can never be incorporated as a Section 8 company established for charitable purposes.
• Cannot Raise Equity Funding: An OPC cannot issue or allot its shares to the general public or any other individual. Such companies can raise funds only by means of NCD (Non-Convertible Debentures) or through loans. Further, an OPC can be converted into a private limited or public company only after 2 years of incorporation.
• Not Eligible for FDI: The business model of OPC further restricts these corporations from raising funds through Foreign Direct Investment. Unlike private limited companies that can raise FDI up to 100% under the automatic route, OPCs are not permitted to receive FDI as no foreign company or individual can directly control or own such business ventures.
• Ownership Restriction: A One Person Company (OPC) cannot be incorporated by a foreign citizen, Non-resident Indian (NRI), or Overseas Citizen of India cardholder. Thus, only those individuals who are Indian citizens and a natural person can register OPC in India. In addition, the sole member is also required to fulfill certain obligations such as having a minimum stay of 182 days in the country in the immediately preceding calendar year.

Incorporating Sustainable Practices in OPC Operations and adopting modern technologies such as artificial intelligence, cloud, and data analytics, can assist One Person Companies (OPCs) to increase their operational efficiency and mitigate the effects of these limitations. With sustainable strategies and advanced technology, OPCs can compete with large organizations and operate on a level playing field.

A Foreign Company: Definitions and Functions

Under the Companies Act 2013 Section 2(42), a Foreign Company is a defined as company or body corporate established outside India. These companies are characterized by:

• Corporations that conduct business in India either through an agent or by itself.
• A foreign company undertakes business activities through an electronic medium or by being physically present.
• These companies can conduct any business activity in any manner within India.

Thus foreign company is a body corporate that is incorporated outside India, and carries out business in the nation itself, but is not mandated to have a place of business in India.

In case Indian individuals or entities hold a minimum of 50% of the paid-up share capital of a foreign company in equity, preference, or partly preference and partly equity, it is required to comply with the provisions of the Company Act and other rules as if they were incorporated in India.

How OPC is a Preferred Choice for Solo Entrepreneurs?

One Person Companies (OPCs) are considered as an ideal business structure for those individuals who are intending to be solo entrepreneurs. Such companies are best suited for people who plan to establish their venture with modest capital availability and has no plans to obtain FDI funding or expanding globally.

Any single entrepreneur, given that he/she is a natural person, a resident of India, and has stayed in India for a minimum of 182 days in the previous year, can apply for OPC registration. These individuals can run the business independently i.e., have complete autonomy over the business operations and decision-making.

In addition, to ease the management and minimize the regulatory burden on sole members of OPC, companies act exempts these companies from preparing cash flow statements, holding AGM (Annual General Meeting), and getting their annual reports signed by a company secretary.

What are the Documents Required for a Foreign Company?

Every foreign company is required to register with ROC (Registrar of Companies) within 30 days of establishing a place of business in India. It must deliver the following documents to ROC to obtain legal authorization to operate within the nation:

• A copy of statutes, charter, memorandum of association, articles of association, or any other instrument that defines the company’s constitution.
• In case the above-mentioned documents are not available in English, they must be translated and sent to ROC.
• Full address of the principal office or registered office of the company.
• A list of secretaries and directors of the company including information as may be prescribed.
• Full address of the company’s office in India which is deemed to be the principal office within the nation.
• Name and address of one or more individual residents in India who are authorized to accept notices or other documents on behalf of the company.
• Details specifying whether the company has opened or closed a place of business in India.
• Declaration specifying that none of the authorized personnel or directors of the company has ever been a convict or debarred from forming a company in India or abroad.

Types of Documents Required for OPC Registration

OPC Registration for Tech Startups or any Small and Medium Enterprises requires submission of the following documents along with the application form and prescribed fees.

• Promoters KYC Documents: To obtain a Certificate of Incorporation from ROC (Registrar of Companies) for OPC, the entrepreneur has to submit identity proof (Aadhar card, Voter ID Card, Driving License, or Passport), PAN Card, address proof (bank statement or utility bill), and a DSC (Digital Signature Certificate).
• No Objection Certificate: For OPC registration, the individual is required to obtain an NOC from the property owner if the registered/ official address is rented. It will state that the property owner has no objection to the company using the premises and verify that it has a legitimate registered office. The certificate must contain the owner’s name, signature, and address.
• Registered Office Address Proof: To verify the official address of the company, an applicant can submit utility bills (water, telephone, electricity, or mobile bills), lease or rent agreements, ownership documents, etc.
• Memorandum of Association (MOA): For OPC Incorporation, an individual has to draft an MOA which will outline the company’s objectives, the liability of members, shareholding pattern, and other crucial information about the company. Applicants can take the help of a legal professional or use the MOA template available on the MCA portal.
• Articles of Association (AOA): Akin to MOA, AOA is another crucial document necessary to incorporate OPC in India. It encompasses the company’s internal rules and regulations, provides information on the duties and powers of directors, and lays down procedures for transferring shares, among others.
• Directors Identification Number (DIN): Every director in the OPC is required to obtain a DIN by filing Form DIR 3 on the official website of MCA along with other requested documents such as identity proof, address proof, recent photograph, etc.
• Digital Signature Certificate (DSC): The proposed director of OPC has to obtain a DSC from a certified agency. DSC is used to electronically sign documents during the OPC registration process and for filing forms with the Ministry of Corporate Affairs (MCA).
• Forms and Declarations: Lastly, entrepreneurs willing to incorporate OPC have to fill out forms like INC 3 (obtain written consent of nominee), DIR 2 (Consent of proposed director confirming they are not disqualified), INC 32 (also known as SPICe, used to incorporate company electronically), and INC 9 (state that first director/ subscriber is not convicted under any law).

Final Thoughts

In India, OPC as a company type has emerged as a popular choice for start-ups and small businesses owing to the various privileges it offers in registration, compliance, and operations. OPC is owned and managed by a single person and requires the appointment of a nominee who will act on behalf of the original single member in case of his/her death or incapacity to enter into a contractual agreement.

A foreign company, on the other hand, is a body corporate established outside India but conducts business activities within India. Such companies are required to have a presence or operations in India either directly or through an agent (liaison office, brand office, etc.). For OPC Incorporation as well as registration of foreign companies, the applicant has to register with the ROC (Registrar of Companies) functioning under the MCA (Ministry of Corporate Affairs). Connect with the professionals of Legal Raasta to obtain your DSC, and DIN, draft your MOA and AOA, and register any type of company formation within India.